In an intercompany ownership scenario, which principle applies to the elimination flow when two entities engage in cross-entity loans?

• A. First common parent
• B. Generation 0
• C. First order relation
• D. Lowest common denominator

Answer: (A)

In consolidation, intercompany eliminations for loans between entities are performed at the first common parent—the nearest shared parent in the entity hierarchy. This means you offset the reciprocal intercompany balances at the level where both entities’ books are brought together, ensuring the intercompany loan does not appear in the consolidated financial statements. For example, if two subsidiaries are under the same parent, the elimination is done at that parent so the payable from one entity and the receivable from the other cancel out in the consolidated view. If the entities sit under different branches, you still identify the first common parent above them and perform the elimination there. The other terms don’t describe the standard elimination flow used for cross-entity loans.